Selective binge

AstraZeneca's M&A flurry clears value hurdle

AstraZeneca is ratcheting up risk with its M&A splurge. The UK pharma group spent $4 billion on a stake in cancer specialist Acerta on December 17, taking its total to more than $7 billion this quarter. But while Astra's deals aren't cheap, they do seem to clear the value hurdle.

The acquisitions reflect Astra's position as the European pharma company most exposed to patent losses. It recently lost exclusivity on blockbuster heart drug Nexium, and will lose a further 17 per cent of sales through 2017, according to Fitch. Pascal Soriot, the chief executive, thinks the group can nearly double sales to $45 billion by 2023, but that requires investment. Bringing new drugs in house makes sense.

The flurry of M&A also reflects industry pressure. Governments are being ever more demanding on prices, particularly in the United States, where insurers and payers are consolidating. That leads pharma companies to specialise. For Astra, that means getting out of areas like gastroenterology, and bulking up in oncology.

The danger, though, is that the acquisitions increase financial leverage at a time when Astra's cashflows are already challenged. UBS expects net debt to hit almost one times EBITDA this year, from 0.1 in 2014. Rating agencies Fitch and Moody's already have the group on negative outlook and its single-A rating lags peers Sanofi and Novartis. Astra is not an expert in the blood cancer area it is buying into. Recent disposals, meanwhile, have raised concerns over the sustainability of Astra's earnings.

Still, the Acerta acquisition looks reasonably priced. Astra is paying $4 billion for a 55 per cent stake in a company whose acalabrutinib blood cancer drug is expected to generate $5 billion in peak annual sales. It still needs regulatory approval, though. Risk-adjusted by 50 per cent to reflect the danger it goes nowhere, makes the purchase price less than three times sales. That is in line with the sector average. It looks good value beside AbbVie's recent purchase of Pharmacyclics, whose main drug is similar to Acerta's. There are notable differences - not least that the Pharmacyclics drug has approval. But that went for nearly five times as much.